It’s not a nice topic to consider, but the death of a company’s sole director who is also the sole shareholder of the company can be problematic if the appropriate legal documents and/or succession planning is not put in place.
What is the difference between a director and a shareholder?
Directors are responsible for the day-to-day running of the business of a company, whereas shareholders are the owners of a company.
Potential issues
A company’s articles of association will provide how new directors can be appointed, typically they are appointed by either the company’s existing directors or shareholders. If a company’s sole director and sole shareholder dies, then potentially no one can appoint a new director, and the day-to-day running of the company would come to a halt. As a result, the company’s assets could be frozen resulting in employees and creditors not being paid.
Also, without the necessary provisions in the company’s articles of association the deceased shareholder will remain as the registered holder of the shares.
Ownership of shares of a sole shareholder on death
If the deceased sole director/shareholder has a valid will, then legal title to the shares would vest with the deceased’s executors at the date of death. A grant of probate will be required to evidence to third parties the executor’s authority to deal with the shares.
If the deceased sole director/shareholder did not have a will, they will have died intestate and then a grant of letters of administration is required to appoint an administrator to deal with the deceased shareholder’s estate, which includes the shares.
Typically, a grant of probate/grant of letters of administration (as appropriate) is required before an executor/administrator can be registered as the holder of the shares. A company’s articles of association should be checked in case they contain contrary provisions preventing this from happening.
The timescales for obtaining a grant of probate vary depending on the complexity of the relevant estate. However, if a person dies intestate an application for a grant of letters of administration will need to be submitted and will take significantly longer than where a person has died leaving a will.
Can a new director be appointed?
In order for the day-to-day running of the business of a company to continue after the death of a sole director/shareholder the company must appoint a new director(s). How this is achieved will depend on what the company’s articles of association say.
For example, under article 17(2) of the Model Articles, the executor/administrator of the last shareholder to have died can appoint, by notice in writing, a person to be a director.
In contrast, a company incorporated under the Companies Act 1985 with Table A articles of association does not give an executor/administrator authority to appoint a director until the executor/administrator is added to the company’s register of members which typically cannot happen until a grant of probate/ grant of letters of administration (as appropriate) is issued. Once the executor/administrator is registered as a member of the company they can then pass a shareholder resolution to appoint a new director. However, this process will be delayed by waiting for the relevant grant to be issued.
If the company has adopted bespoke articles of association, then these will need to be checked carefully to determine if the executor/administrator has the authority to appoint a new director.
No surviving director and no authority to appoint a new director
Executors/administrators do not have the authority to update a company’s register of members which is required to register the executors/administrators as the new holders of the shares. In the absence of a court order, this authority always sits with a company’s directors and until the register of members is updated the deceased shareholder will remain as the registered holder of the shares.
If a company does not have any directors and the executors do not have the authority to appoint a new director, then the only option available to the executors is to apply to court under section 125 of the Companies Act 2006 for the “rectification” of the company’s register of members and for authority for the executors to make the “rectification” in the absence of any surviving directors. This application can be costly and is granted at the discretion of the court. It is therefore easier and faster to make sure your company’s articles of association are up to date.
Once registered as a member of the company, the executors can pass the required shareholder resolution to appoint a new director.
Tips for a sole director/shareholder of a private limited company
Our tips are:
- If appropriate, ensure the company has more than one director and shareholder, you may need to take professional advice on this;
- ensure that your company’s articles of association address what will happen if the company’s sole director/shareholder dies;
- ensure that you have a current will in place and that the provisions contained in the will regarding shares reflect the provisions contained in your company’s articles of association; and
- take certain practical steps such as ensuring your executors will be able to access passwords/ payroll, etc on your death and consider if certain leadership roles should be passed to other individuals at your company.
If you are in any doubt as to whether your company’s articles of association will be able to deal with the death of a sole director/shareholder, please contact our Corporate team who will be able to assist. Additionally, if you do not have a will or wish to update it, then please do contact our Wills, Trusts and Estate team who will be able to advise.
